Understanding Normal Profit and Its Uses
A condition in the company’s economy where the resultant on subtracting the complete cost from the revenue comes to zero is termed as normal profit. In other words normal profit is that minimum amount of profit that is required by the firm to keep the competition in the business market. Learners can search for topics like normal profit homework answers online to get detailed information on the subject.
Simplifying normal profit
When the economic profit of a company equals to zero, then the firm is said to be in a condition of normal profit. Thus, the term is also known as zero profit of economy. Whenever the resultant cost and the resultant revenue are equal to each other, then the normal profit and economic profit of the company are same. While calculation of normal profit, the total amount of cost is divided into two parts, i.e. implicit and explicit costs.
To determine whether the company is at a condition of normal profit or not, the following formula should be used –
COMPLETE REVENUE – COMPLETE COST = 0
i.e. COMPLETE REVENUE – (IMPLICIT COST + EXPLICIT COST) = 0
In case the resultant of subtracting total costs from total revenues is anything other than zero, then the company is not in a condition of normal profit. If the resultant is more than zero, then the company is said to be in a condition of economic profit or abnormal profit and if the resultant is less than zero, then the firm is said to be in a condition of economic loss.
When the resources that have been made available to the firm are used appropriately to prevent loss but not that much to earn required revenue, then the company reaches a state of normal profit. While calculating the normal profit, proper knowledge of the parts of total cost is essential. Total cost is actually the result of addition of implicit and explicit costs. Students wanting to master the concept of normal profit can search for links like normal profit homework answers online and practice the problems available there.
The costs that are supposed to have occurred already but are not necessarily recorded as an expense separately are called implicit costs. The opportunity cost that comes up when a firm provides certain resources for an assignment without any compensation for usage of those resources is the implicit cost. The income from interest of funds, the depreciation cost from machines could be examples of implicit costs. Intangible expenses that cannot be recorded easily are also considered to be implicit costs.
Generally accounting does not require keeping note of implicit costs. Learners can know more about implicit cost by searching for links like normal profit homework answers online.
The clear, actual, accountable flow of cash from a firm that ultimately brings reduction to the net profit is termed as explicit cost. The costs that are incurred and have clear accountability are the explicit costs. Examples of such costs could be the wages, the cost of rent etc that are actual costs incurred with clear accountability.
How can normal profit be useful?
When normal profit is calculated by a firm, it gives the owners a parameter that they can be used to analyze the profitability of the employees’ performance. This can be then compared with the other business assignments. When a venture goes through normal profit, the business is said to have a neutral value, accordingly, economic profit or loss assigns positive or negative value to the business respectively.
Thus this data can be utilized for comparing various opportunities of business with each other. In macroeconomics, the concept of normal profit can also be utilized to find out whether the firm is growing or deteriorating. The scope of new ventures in an industry can also be determined by the knowledge of normal profit. To know more about the uses of normal profit, students can search for topics like normal profit homework answers online.
Normal, economic and accounting profits
The income from a business is considered to be profit in simple term. Profit is the lifeline of a firm because no business can run without profit. When the revenue generated is surplus in comparison to the expenses involved in the business, and then it is considered to be accounting profit.
Economic profit is little different from accounting profit, it is the amount that is left after subtracting all the explicit costs and implicit costs from the revenue. When a business is functional, it has to obtain a nominal amount of profit to survive with the competition in the market. This minimum amount of profit is called normal profit.
Comparison between normal, economic and accounting profits
- The actual profit that a company earns during a specific period of its functioning is called the accounting profit of the firm. When the firm earns an amount of profit that is sufficient to cover the costs required for its functioning then it is termed as economic profit. On the contrary, normal profit comes up when total revenues of the firm equal to its total costs.
- The biggest contrast between normal, economic and accounting profits is that accounting profit is generally much more than normal and economic profits.
- The calculation of accounting profit is used by the firm to gain knowledge about the profitability of the company. Economic profit shows the financial condition of the firm and the normal profit shows the firm’s ability to meet its costs.
All in all, knowledge of normal profit is necessary as it helps in understanding the state of survival of a firm in the market. Students wanting to learn more can search for links like normal profit homework answers online.